Interest Rates And Recessions

Recently I took a look at interest rates (1 Yr CMT) and the relationship with recessions.

What I found was a consistent pattern of the 1 Yr CMT and recessions.

Based on the last seven recessions, including the recession ending June 2009, the 1 Yr CMT continued lower for an average of 11 months after the end of the recession and then began a sharp rise that took, on average 40 months from the official end of the previous recession to the ultimate peak in interest rates for that cycle.

The overall pattern of the interest rate cycle:
Step 1: End of recession
Step 2: Interest rates continue to drop after the end of the recession for an average of 11 months, with the average rate of the CMT continuing lower by 1.18%.
Step 3: Interest rates begin to rise, for 40 months from the end of recession to the ulimate rate peak, with a total increase in the CMT rate, from rate trough to rate peak, of 6.05%.


The analysis was based on monthly data, provided by the St. Louis Federal Reserve.

Period 1
End of Recession: Nov 1970
1 Yr CMT, Nov 1970: 5.51%
1 Yr CMT, rate trough, March 1971: 3.69%
Rate Decline at Trough: -1.82%
CMT Trough, Number of months from end of recession: 4 months

CMT Rate Peak: 9.36%
CMT Rate Peak, Date: August 1974
CMT Rate Peak, Number of months from end of recession: 45 months
Increase in Rates: End of Recession to Interest Rate Peak: 3.85% increase
Increase in Rates: Interest Rate Trough to Interest Rate Peak: 5.67% increase

Period 2
End of Recession: March 1975
1 Yr CMT, March 1975: 6.11%
1 Yr CMT, at rate trough, December 1976: 4.89%
Rate Decline at Trough: -1.22%
CMT Trough, Number of months from end of recession: 21 months

CMT Rate Peak: 15.82%
CMT Rate Peak, Date: March 1980
CMT Rate Peak, Number of months from end of recession: 60 months
Increase in Rates: End of Recession to Interest Rate Peak: 9.71% increase
Increase in Rates: Interest Rate Trough to Interest Rate Peak: 10.93% increase

Period 3
End of Recession: July 1980
1 Yr CMT, July 1980: 8.65%
1 Yr CMT, at rate trough, July 1980: 8.65%
Rate Decline at Trough: 0.00%
CMT Trough, Number of months from end of recession: 0 months

CMT Rate Peak: 16.72%
CMT Rate Peak, Date: August 1981
CMT Rate Peak, Number of months from end of recession: 13 months
Increase in Rates: End of Recession to Interest Rate Peak: 8.07% increase
Increase in Rates: Interest Rate Trough to Interest Rate Peak: 8.07% increase

Period 4
End of Recession: November 1982
1 Yr CMT, November 1982: 9.16%
1 Yr CMT, at rate trough, January 1983: 8.62%
Rate Decline at Trough: -0.54%
CMT Trough, Number of months from end of recession: 2 months

CMT Rate Peak: 12.08%
CMT Rate Peak, Date: June 1984
CMT Rate Peak, Number of months from end of recession: 19 months
Increase in Rates: End of Recession to Interest Rate Peak: 2.92% increase
Increase in Rates: Interest Rate Trough to Interest Rate Peak: 3.46% increase

Period 5
End of Recession: March 1991
1 Yr CMT, March 1991: 6.40%
1 Yr CMT, at rate trough, September 1992: 3.18%
Rate Decline at Trough: -3.22%
CMT Trough, Number of months from end of recession: 18 months

CMT Rate Peak: 7.14%
CMT Rate Peak, Date: December 1994
CMT Rate Peak, Number of months from end of recession: 45 months
Increase in Rates: End of Recession to Interest Rate Peak: 0.74% increase
Increase in Rates: Interest Rate Trough to Interest Rate Peak: 3.96% increase

Period 6
End of Recession: November 2001
1 Yr CMT, March 1991: 2.18%
1 Yr CMT, at rate trough, June 2003: 1.01%
Rate Decline at Trough: -1.17%
CMT Trough, Number of months from end of recession: 19 months

CMT Rate Peak: 5.22%
CMT Rate Peak, Date: July 2006
CMT Rate Peak, Number of months from end of recession: 56 months
Increase in Rates: End of Recession to Interest Rate Peak: 3.04% increase
Increase in Rates: Interest Rate Trough to Interest Rate Peak: 4.21% increase

Period 7
End of Recession: June 2009
1 Yr CMT, March 1991: 0.51%
1 Yr CMT, at rate trough, October 2010: 0.23%
Rate Decline at Trough: -0.28%
CMT Trough, Number of months from end of recession: 16 months

CMT Rate Peak: ?
CMT Rate Peak, Date: ?
CMT Rate Peak, Number of months from end of recession: ?
Increase in Rates: End of Recession to Interest Rate Peak: ?
Increase in Rates: Interest Rate Trough to Interest Rate Peak: ?

Averages for 7 Periods:
Average Initial Drop in Rate: -1.18% , 11 months
Average Rate Increase From Trough to Peak: 6.05% Increase, 40 months After End of Recession

Target of 1 Yr CMT, based on 2001 Recession/Recovery: 4.44%
Target Date of Next Peak, based on 2001 Recession/Recovery: Feb 2013

Manufacturing Jobs and the Economic Recovery

Recently I had an online chat regarding the excruciately slow economic progress begin made during the current recovery.

One of my chat-mates made the assertion that the problem with the recovery is that we've lost most of our manufacturing jobs.

It's very true that we've lost a number of manufacuting jobs in the past 25 years, but the loss of manufacturing jobs has nothing to do with the slow recovery this tie around.

Here's how the conversation went.

We're having trouble recovering because we have lost most of our manufacturing jobs. All the rest is smoke and mirrors. During all previous recessions, we've had a healthy manufacturing economy that could pull us out of the recession, without having to mortgage our future further.

And here was myy response:
Well, this sounds good. However, for this to be true, we would have to demonstrate that this recovery is somehow different from past recoveries, that we are bleeding more manufacturing jobs this time versus the previous recoveries. So let’s take a look at the evidence to see if your assertion stands up to scrutiny.

So what we’re going to look at is: 1) the number manufacturing lobs lost during the previous two recessions, 2) the number manufacturing lobs lost or gained 1 year after the official end of the recession, 3) the number manufacturing lobs lost or gained 2 years after the official end of the recession.

What’s clear, based on the data, is that the post-recession “recovery” period this time around has been much more favorable. The negative job loss in manufacturing is much less negative. As far as being a drag on the recovery, the loss of manufacturing jobs is clearly not the answer.

Last three recessions according to the NBER:

Recession Period: July 1990 – March 1991
Recession Began: July 1990
Employees on Nonfarm Payroll Manufacturing, July 1990: 17,703,000
Recession End: March 1991
Employees on Nonfarm Payroll Manufacturing, March 1991: 17,141,000
Total Nonfarm Payroll Manufacturing Job Loss during recession: - 562,000
Number of Nonfarm Payroll Manufacturing Jobs 1 Yr after end of recession, March 1992: 16,805,000
Manufacturing Job Losses March 1991 (Recession End) to March 1992: -336,000
Number of Nonfarm Payroll Manufacturing Jobs 2 Yr after end of recession, March 1993: 16,795,000
Manufacturing Job Losses March 1991 (Recession End) to March 1993: -346,000

Recession Period: March 2001 – November 2001
Recession Began: March 2001
Employees on Nonfarm Payroll Manufacturing, March 2001: 16,939,000
Recession End: November 2001
Employees on Nonfarm Payroll Manufacturing, November 2001: 15,825,000
Total Nonfarm Payroll Manufacturing Job Loss during recession: 1,114,000
Number of Nonfarm Payroll Manufacturing Jobs 1 Yr after end of recession, November 2002: 14,992,000
Manufacturing Job Losses Nov. 2001 (Recession End) to Nov. 2002: -833,000
Number of Nonfarm Payroll Manufacturing Jobs 2 Yr after end of recession, November 2003: 14,315,000
Manufacturing Job Losses Nov. 2001 (Recession End) to Nov. 2003: -1,510,000


Recession Period: December 2007 – June 2009
Recession Began: December 2007
Employees on Nonfarm Payroll Manufacturing, December 2007: 13,726,000
Recession End: June 2009
Employees on Nonfarm Payroll Manufacturing, June 2009: 11,782,000
Total Nonfarm Payroll Manufacturing Job Loss during recession: 1,944,000
Number of Nonfarm Payroll Manufacturing Jobs 1 Yr after end of recession, June 2010: 11,672,000
Manufacturing Job Losses June 2009 (Recession End) to June 2010: -110,000
Number of Nonfarm Payroll Manufacturing Jobs November 2010: 11,648,000
Manufacturing Job Losses June 2009 (Recession End) to November 2010: -134,000

Sources:
• Recession Dating: NBER: http://www.nber.org/cycles/cyclesmain.html
• Employees on Nonfarm Payrolls: Manufacturing: Federal Reserve Bank, St. Louis, taken from U.S. Department of Labor, Bureau of Labor Statistics: http://research.stlouisfed.org/fred2/series/MANEMP/downloaddata?cid=11

Quantitative Easing Explained

Buy The Dip

The language is salty, but a very funny video.